What is a drawdown pension?

Drawdown is one of the main options for accessing your pension savings in retirement. From the age of 55 you can convert your pension to a drawdown pension, which keeps your money invested for longer. At the same time, you can take your pension flexibly, withdrawing money whenever you need it.

What is drawdown?

Income drawdown allows you to draw down on your pension, without accessing all of your retirement savings in one go. Any money you don’t withdraw remains invested, giving you the opportunity to keep growing your pension after you’ve retired. It’s different to an annuity because your income isn’t guaranteed, and the size of your pension pot can grow or reduce, depending on how your investments perform.

Since the pension freedoms were introduced in 2015, the only drawdown option open to new retirees is flexi-access drawdown. This was designed to replace all other drawdown products, such as capped drawdown and flexible drawdown. If you have an older drawdown product, it may be governed by slightly different pension drawdown rules and you should speak to your pension provider or scheme administrator for more information.

How drawdown works

As soon as you pass your 55th birthday you can begin accessing your personal or workplace pension. You can take up to 25% as a tax-free lump sum or take 25% of each withdrawal tax-free. Your tax-free amount doesn’t use up any of your personal allowance, but once your withdrawals exceed this threshold you’ll be required to pay income tax. It’s important to consider how much you withdraw from your drawdown pension, and when you do so, to ensure you don’t move into a higher tax bracket.

One of the main advantages of a drawdown pension is its flexibility. You can choose when you take an income and can also choose to buy an annuity or an alternative retirement product with your savings at any time.

  • Pension drawdown example

If you have have a small pension with a value of £60,000 you can take 25% as a tax-free lump sum, leaving £45,000 in drawdown. Once you exceed your personal allowance, each withdrawal will be subject to income tax. However, if this is your sole income you’ll be only be charged the basic rate of income tax, as your total pot falls within the lowest tax band.

If you have a larger pension with a value of £400,000 you can take £100,000 as a tax-free lump sum. You’ll then have £300,000 to invest via drawdown. The amount you choose to withdraw in any given tax year will determine how much tax you pay and you could easily be required to pay higher rate or additional rate tax if you withdraw too much too soon or have other earnings. If, for example, you choose to withdraw a further £100,000 in a single year you’ll have to pay higher rate tax at 40%.

Choosing drawdown from PensionBee

Drawdown from PensionBee is a simple and stress-free way to access your pension. You can make withdrawals in just a few clicks through your online dashboard, and can use our calculator to see how much tax you’ll be charged before you request a withdrawal. Sign up today.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 30-09-2018

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